05/06/2014

Twitter's (TWTR:NASDAQ) stock fell in after hours trading on April 29 after the company reported weaker than expected user growth numbers during its Q1 2014 earnings call conference. The next day the stock fell -5.61 or -12.9% in early trading, before recovering to close at 38.97, down -4.51 or - 10.37%.

Twitter stock (TWTR:NASDAQ) plunges in early trading on April 30, 2014 after reporting dismal user growth numbers during its April 29, 2014 earnings conference call with analysts. (Click Image To Enlarge)

The stock is down 11% in reaction to the numbers, dragging it to its all-time lows.

Monthly users were lighter than the Street wanted, which killed the stock.

Twitter CEO Dick Costolo (Click Image To Enlarge)

On the earnings call, CEO Dick Costolo said he was "really happy" with engagement in Q1. Favorites and retweets were up 26% in the quarter, which is a sign that people are using Twitter more and more. Costolo also said that net new users were just as engaged as older users.

Costolo also tried to convince analysts that despite the small user numbers, Twitter's reach is much bigger. He said that MoPub, Twitter's mobile ad network, reaches 1 billion users across iOS and Android devices.

Costolo also rejected the idea that Twitter is a niche service. He said that there were 3.3 billion views of tweets related to the Oscars. They happened all over the place, on TV, and elsewhere.

He used this as proof that Twitter is a well-known, mainstream service. Now, all Twitter has to do is convince people that there is value in using Twitter on a daily basis.

Costolo's explanations were admirable, but fell short. When the call started, Twitter was down 8-9%. By the end of the call, it was down 10-11%.

COMMENTARY: I don't know why investors are so concerned about a slowdown in Twitter's user growth. Facebook has experienced a similar slowdown in user growth. This is a trend that will continue for both social network leaders.

What is more revealing is average revenue per monthly active user (ARMAUs). If you compare the ARMAU for both Facebook and Twitter, you see that both are experiencing declines (see graph below). The U.S. continues to be the largest advertising markets for both social networks. Facebook's average revenue per MAU has consistently been a bit more than twice that of Twitter. What hasn't been mentioned is that Facebook and Twitter both experienced similar declines in Q1 2013. It's just a theory, but users tend to use social networks quite heavily during the holiday period to exchange holiday greetings and pass along gift recommendations and deals to their friends and followers. As a consequence, usage and engagement declines in the first quarter of the year. The same thing happened this past quarter.

As with Facebook, Twitter uses three metrics to measure users: user growth, engagement and monetization. Below are the aforementioned metrics for Twitter for Q1 2014 compared to Q1 2013:

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When compared to Q1 2013, Twitter experienced decreases in user growth and engagement, but was able to increase monetization for Q1 2014.

Twitter provides occasional glimpses at its daily active users (DAUs) per MAU, for example in its S-1 filing and again on its Q1 2014 earnings call. But there’s too little data here to see long-term trends, and what little we do have compares unfavorably to Facebook’s equivalent metrics:

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On other metrics, too, Twitter compares unfavorably to Facebook. There’s sheer scale, where Twitter’s base of MAUs is just barely catching up to Facebook’s annual growth in mobile MAUs:

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The reason for that is that Twitter’s growth is plodding along very consistently at between 65 and 70 million net MAU adds year on year each quarter, a number that’s remained consistent for the last two years:

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The problem is, whereas 70 million represented 100% growth two years ago, it now represents less than 40% growth, so that the growth curve everyone is obsessed about looks like this:

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At this rate, Twitter will reach about 400 million users in two years from now, which is equivalent to Facebook’s current base in Asia alone. And then there’s monetization, where Twitter’s ad revenue per user, though growing rapidly, is still about half of Facebook’s on a global basis:

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The challenge for Twitter is that Facebook feels like the most comparable company out there, but in almost every respect Twitter looks inferior. Twitter is fundamentally a much smaller business than Facebook, and it’s unlikely it will ever be able to bridge that gap unless something fundamentally changes.

It’s for that reason, then, that Twitter has started to play up its MoPub ad exchange and the 1 billion or so users it can reach with ads. It recognizes that its upside as a company and as a stock is fundamentally limited by the Twitter user base, which is growing slowly and generating relatively small spend per user. As such, Twitter is trying to get them to see the bigger picture in the form of MoPub. The fundamental challenge, though, is that Twitter is providing absolutely no data on this part of the business. And all its key metrics – number of monthly active users, ad revenue per user, timeline views per user and so on – are increasingly irrelevant to this part of the business.